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Incorporating theoretical restrictions into forecasting by projection methods

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  • Giacomini, Raffaella
  • Ragusa, Giuseppe

Abstract

We propose a method for modifying a given density forecast in a way that incorporates the information contained in theory-based moment conditions. An example is "improving" the forecasts from atheoretical econometric models, such as factor models or Bayesian VARs, by ensuring that they satisfy theoretical restrictions given for example by Euler equations or Taylor rules. The method yields a new density (and thus point-) forecast which has a simple and convenient analytical expression and which by construction satisfies the theoretical restrictions. The method is flexible and can be used in the realistic situation in which economic theory does not specify a likelihood for the variables of interest, and thus cannot be readily used for forecasting.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8604.

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Date of creation: Oct 2011
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Handle: RePEc:cpr:ceprdp:8604

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Keywords: Bayesian VAR; Euler conditions; Exponential tilting; Forecast comparisons;

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References

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  1. Christine De Mol & Domenico Giannone & Lucrezia Reichlin, 2008. "Forecasting using a large number of predictors: is Bayesian shrinkage a valid alternative to principal components?," ULB Institutional Repository 2013/6411, ULB -- Universite Libre de Bruxelles.
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Cited by:
  1. Raffaella Giacomini, 2013. "The relationship between DSGE and VAR models," CeMMAP working papers CWP21/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.

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